Cost Accounting: Costing By-Products and Joint Products

Cost Accounting
Chapter 8
Costing By-Products and Joint Products
Learning Objectives
1. Distinguish by-products from joint products.
2. Define joint cost.
3. Assign cost to by-products by different methods.
4. Allocate joint production cost to joint products by
different methods.
5. Evaluate the relationship of joint costs to decision
making and profitability analysis.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in
whole or in part. 2
8-1 By-Products and Joint Products
Defined
• By-product denote a product of relatively small total
value produced simultaneously with a product of greater
total value.
• The product with the greater value, commonly called the
main product, greater quantities.
• Joint products are produced simultaneously by a
common process or series of processes, with each
product possessing more than nominal value in the form
in which it is produced.
• Split-off point is defined as the point at which these
several products emerge as separable, individual units.
whole or in part. 3
Defined
• Nature of By-Products and Joint Products
– By-products can be classified into two groups according to
their marketable condition at the split-off point:
(1) those sold in their original form without need of further
processing.
(2) those that require further processing to be salable.
whole or in part. 4
Defined
– meat-packing industry
– production of gasoline
– joint product
– tobacco manufacturers
whole or in part. 5
Defined
– These manufacturers have a dual problem of joint cost
allocation:
(1) materials cost is applicable to all grades.
(2) subsequent manufacturing costs are incurred simultaneously for
all the different grades.
whole or in part. 6
Defined
• Joint Costs
– A joint cost can be defined as the cost that arises from the
simultaneous manufacturing of products produced from the
same process.
– Joint cost is incurred prior to the split-off point.
– These separable product costs are identifiable with the
individual product and, generally, need no allocation.
whole or in part. 7
Defined
• Difficulties in Costing By-Products and Joint
Products
– A true joint cost is indivisible.
– The cost accumulated before the split-off point must be
borne by the difference between the sales price and the cost
to complete and sell each product after the split-off point.
– Cost allocation methods used for establishing the unit cost
of a joint product are quite arbitrary.
whole or in part. 8
8-2 Methods of Costing By-Products
• In the first category, a joint production cost is not
allocated to the by-product.
• Two different methods are used
• Revenue resulting from sales of the by-product is
credited either to income or to the cost of the main
product.
• Gross revenue from the method 1
• By-product’s costs subsequent
• Split-off are offset against the byproduct revenue
• Net revenue from the by-product and will be denoted
as method 2.
whole or in part. 9
• In method 1
a. Other income
b. Additional sales revenue
c. A deduction from the cost of goods sold of the main
product
d. A deduction from the total production cost of the main
product
whole or in part. 10
• In method 2, the net by-product revenue is shown on
the comprehensive income statement in any of the
four ways listed for method 1.
• Second category of costing by-products, some portion
of the joint cost is allocated to the by-product.
• Inventory costs are based on this allocated joint cost
plus any cost of processing the by-product after split-
off. In this category, two methods.
• Method 3 is the replacement cost method.
• Method 4 is the market value method, which is also
known as the reversal cost method.
• Method 1: Recognition of Gross Revenue
– gross revenue method
– Method 1a: By-Product Revenue as Other Income.
• Method 1: Recognition of Gross Revenue
– Method 1b: By-Product Revenue as Additional Sales
Revenue.
– Method 1c: By-Product Revenue as a Deduction from the
Cost of Goods Sold.
– Method 1d: By-Product Revenue Deducted from
Production Cost.
• Method 2: Recognition of Net Revenue
– The net revenue method recognizes the need for assigning
traceable costs to the by-product.
– The costs incurred after the split-off point to process or
market the by-product are recorded in accounts separate
from those for the main products.
• Method 3: Replacement Cost Method
– The method ordinarily is used by companies whose by-
products are used somewhere within the same company.
• Method 4: Market Value (Reversal Cost) Method
– The method is basically similar to the technique illustrated
in method 1d.
– It reduces the manufacturing cost of the main product, not
by the actual revenue received, but by an estimate of the
by-product’s value.
– The by-product account is charge with this estimated
amount
– The production cost of the main product is credited.
– It is also possible to use the total market values of the main
product and the by-product at the split-off point as a basis
for allocating a share of joint cost to the by-product.
8-3 Methods of Allocating Joint
Production Cost to Joint Products
• Joint production can be allocated to joint products
under one of the following methods.
1. The market value method
2. The average unit cost method
3. The weighted-average method
4. The quantitative unit method
• Market Value Method
– The market value of any product is to some extent a
manifestation of the cost incurred in its production.
– Another argument for using the market value method of
allocating joint costs is that it is neutral.
– It does not affect the relative profitability of the joint
products.
– The choice among accounting methods tends to be
arbitrary when the proportions of the joint products
composing the output mix cannot be changed.
– Joint Products Salable at Split-Off.
– Under the market value method, each joint product yields
the same gross profit percentage.
– Joint Products Not Salable at Split-Off.
– If certain joint products are salable at the split-off point
while others are not, the market values at the split-off point
are used for the former group.
– For the latter group, hypothetical market values are
required.
25
• Average Unit Cost Method
– The average unit cost method attempts to allocate joint
cost among joint products so that each product is allocated
the same per-unit amount of joint cost.
Total joint production cost $120, 000
  $2 per unit
Total number of units produced 60, 000
• Weighted-Average Method
– Predetermined weight factors may be assigned to each unit.
– Weight factors are based on attributes such as size of the
unit, difficulty of manufacture, time consumed in making
the unit, difference in type of labor employed, and amount
of materials used.
• Weighted-Average Method
Product A—3 points Product C—13.5 points
Product B—12 points Product D—15 points
– Using the figures from the previous example, the joint cost
allocation is illustrated as follows:
• Quantitative Unit Method
– The quantitative unit method allocates joint cost on the
basis of some common unit of measurement, such as
pounds, gallons, tons, or board feet.
8-4 Joint Cost Analysis for Managerial
Decisions and Profitability Analysis
• Joint cost allocation methods indicate that the amount
of the cost to be apportioned to the various
products emerging at the split-off point is difficult to
establish for any purpose.
• The acceptance of an allocation method for the
apportionment of joint cost does not solve the
problem.
8-4 Joint Cost Analysis for Managerial
Decisions and Profitability Analysis
• It seems important to calculate the profit margin in
terms of total combined units.
• For profit planning, management should consider a
joint product’s contribution margin after separable
costs are deducted from sales.
• Net profit determined by allocating joint costs is not a
reliable guide for profit planning, because the net
profit data cannot be used to predict the outcomes of
different decisions.
8-5 Ethical Considerations
• Ethical considerations require use of joint cost
allocations that fairly present financial results.
• The methods employed should not intentionally
distort inventory cost or manipulate reported income
and assets.

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